Black Markets Raise their Ugly Head
You know there is a government-created shortage when a black market raises its useful head—sorry, its ugly head. “Government-created shortage” is a pleonasm: except accidentally and very temporarily, it is the only sort of shortage that exists, as opposed to a “smurfage.” A black market is followed by government repression. It is already happening here about items subject to the current price controls, just like it happened in 18th-century France or in the USSR, or like it is happening now in Venezuela or Cuba, and in countless times and places during the adventure of mankind.
Whether it will get worse or not depends on whether and how long the government continues to repress voluntary exchange.
A few days ago, I ran across a March 20th press release from the Department of Justice about a Brooklyn man who had been arrested for selling “at inflated prices” N95 masks and other medical supplies whose prices are controlled by the federal government under the Defense Production Act. (Prices are also capped by states’ “price gouging” or “profiteering” laws.) We don’t have to like the specific suspect in this story, and black-market entrepreneurs don’t need to be Randian characters, for us to realize that they offer a useful service (if they have not stolen their wares, of course). Black-marketers sell the controlled goods to people who would otherwise not have them, because they would have been previously sold-out to more or less random, first-arrived, queueing people for whom it is less important than for those who are willing to pay more.
As long as price ceilings are maintained, more of this repression will happen.
In The Wealth of Nations, Adam Smith prudently defends the smuggler, who is one sort of black-marketer. Smith sees him as
a person who, though no doubt highly blameable for violating the laws of his country, is frequently incapable of violating those of natural justice, and would have been, in every respect, an excellent citizen, had not the laws of his country made that a crime which nature never meant to be so. … Not many people are scrupulous about smuggling, when, without perjury, they can find any easy and safe opportunity of doing so. To pretend to have any scruple about buying smuggled goods, though a manifest encouragement to the violation of the revenue laws, and to the perjury which almost always attends it, would in most countries be regarded as one of those pedantic pieces of hypocrisy which, instead of gaining credit with any body, serve only to expose the person who affects to practise them, to the suspicion of being a greater knave than most of his neighbours. By this indulgence of the public, the smuggler is often encouraged to continue a trade which he is thus taught to consider as in some measure innocent; and when the severity of the revenue laws is ready to fall upon him, he is frequently disposed to defend with violence, what he has been accustomed to regard as his just property. From being at first, perhaps, rather imprudent than criminal, he at last too often becomes one of the hardiest and most determined violators of the laws of society.
The black market reestablishes the free market when the latter is banned by government edict. On a free market, the price finds its equilibrium at a level where the most pressing demands are satisfied. Competition among sellers pushes the price towards marginal cost. A rapid increase in demand or decrease in supply will push the price high enough to call forth new supplies, Later, new entrants in the market or eventually new plants will push it down at least part of the way.
Of course, there exists a wide spectrum between a totally free and a totally non-free society but, given this caveat, we may say a black-market price is, in non-free society, what is called a free-market price in a free society.
Note that, on the free market, anybody, including a poor person, can purchase anything as freely as anybody else, including George Soros. It suffices that the buyer thinks the thing is important enough to forego other things. Somebody who takes care of a contagious person at home will be willing to pay more for face masks than somebody who may be wealthier but lives alone in the woods. Note also that charitable organizations can buy anything they want on the free market and redistribute it to anybody they think should have it. Government itself, within the limits of the resources taxpayers transfer to it (and within some other necessary limits), may bid on the market.
Those who think it is immoral to sell a face mask for $10 are free (at least in a free society) to fabricate or buy some and sell them at lower prices. More than the black-market trader or smuggler, the immoral person seems to be the one who sits at home and does nothing to increase supply or make it more available for those who need it most.
Apr 14 2020 at 12:23pm
As I write this, Gov. Cuomo is speaking how he wants FEMA to have a monopoly on testing for COVID-19…
I told this story before but it fits here. I used to have lunch with a (now retired) colleague who spent his “first life” teaching at a university in the Soviet Union. One day another colleague who had emmigrated from the Netherlands joined us for lunch. My Dutch colleague commented that once he took students on a trip in the Soviet Union. He mentioned that he was struck by the lack of advertising in the USSR. The other colleague responded of course, when there’s no choice there’s no need for advertising.
I joked that I thought it was because there was nothing to buy. To which my Ukrainian colleague mentioned that there is always something to buy — on the black market.
Another time he asked what was going on with the Occupy Wall Street people. “Don’t they know it’s been mathematically proven (by the Soviet mathematician in charge of central planning) that communism can’t work?”
Apr 16 2020 at 11:14am
Danno: In a sense, for us in more or less free societies, it’s a tragedy that the Soviet empire does not exist anymore. They were demonstrating so nicely the consequences of what so many naïve people in the US want. However, it did take time for many, if not most, Western individuals to discover this, even at the time.
Apr 19 2020 at 12:28am
Well said. We have lost the USSR as a bad example but we do have Venezuela. Still, as you mentioned, there are many who will not see or admit that they see. If we opened up trade with them it would remove one of their excuses and make the difference more stark. If we had a more free market the difference would be even more obvious.
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